Monday, March 7, 2011

Resource Alam Indonesia Tbk (KKGI)

by Mandiri Securities

We had a site visit to PT Insani Bara Perkasa, the wholly- owned subsidiary of PT Resources Alam Indonesia (KKGI) in Samarinda last week. We went to the ground to get a sense the weather condition and production progress there. We were accompanied by the President Director of KKGI, Mr Pintarso Adijanto, and Mr Suparno Adijanto, advisor of KKGI. We went to the Loa Janan block, the largest operating block with integrated facilities, which is strategically located near the city of Samarinda and the Mahakam river.

Strategically located. It only took around 2 hours on the road from the Balikpapan airport to the Loa Janan block in Samarinda. We went to Loa Duri, sub block of Loa Janan that has 20 hectares in concession area equipped with integrated facilities including crushing plant of 500tpd capacity, 150k- ton ROM stockpile capacity and terminal with loading rate of 1,200tph. On average the hauling road in the Loa Janan site is only around 10 - 14km from the mine to the port. Barging from Loa Duri to transshipment point at Muara Jawa and Muara Berau takes around 24 - 36hours. And interestingly it only takes 30 minutes from the mine site to the hotel.

Robust production. January and February’s coal production reached 270k tons and 285k tons respectively. Daily production from three sub blocks of Tegal Anyar, The South Purwajaya and Barokah have a combined production of 14k - 17k tons per day. Tani Aman sub block has started producing 600 - 700tons per day. KKGI plans to develop the North Purwajaya site by end of this year which has higher CV of 5800-5900 adb with total reserves of 2.6Mt and low SR of 6.4x. So, FY11 production target of 3.55 Mt coal should be achievable in our view since seasonally in early year has low production cycle due to the rainy season. During the dry season, the management believes monthly production could reach 350-400k tons per month.

Expansion remains intact. The company has purchased 2 units of mobile coal crushers (please see exhibit 4) with capacity of 250 tpd each which costs around EUR60k each. It claims that KKGI is the first Indonesian buyer for this new technology equipment made in Finland. The management plans to get its reserves and resources a JORC certification in 2012 to gain market’s trust and confidence. It is expected to cost around US$20mn. Given the strong relationship its group has with the local government, inorganic growth should be no problem for KKGI. KKGI is currently looking for green field coal assets which the acquisition will be done this year.

Attractive valuation. KKGI expects FY11 net profit to rise by 138.9% yoy to Rp413bn mainly driven by higher selling price and coal production. It has contracted around 1.7Mt coal at average selling price of US$61/ton FOB vessel and 500k tons with the state- owned electricity company, PLN, at US$47/ton FOB barge. Most of its coal sold based on the ADB contract instead of the GAR contract. Currently KKGI is traded attractively at 8.0x PER11F based on the company’s estimates, 20-25% discount to peers at 10x -11x PER11F.

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